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Franchise Law Update

Commentary on Business and Legal Issues of Franchising

When Does a Social Media Post become an Illegal Implied Endorsement? (We’re About to Find Out)

Posted in Industry Updates, Legal Decisions

Imagine this scenario:  A famous celebrity visits your store. The visit is completely unsolicited.  In fact, the visit is simply for the celebrity to shop. And she does–shop that is. In fact, she makes enough purchases that she carries bags bearing the logo of your store onto the street and is photographed by paparazzi carrying those bags. Then that photo gets posted to a celebrity news site. The star is big. She shopped at your store. You want to associate your store–your brand–with this celebrity. So, you might wonder, can you take the photo and post it to your store’s social media accounts like Twitter and Facebook? You, me and the rest of the world are about to find out.

OLYMPUS DIGITAL CAMERAThis scenario is exactly what is at issue in a case filed in the United States District Court for the Southern District of New York, Katherine Heigl v. Duane Reade, Inc., No. 14 CV 2502. Ms. Heigl, a TV and Movie actress who has won a primetime Emmy Award for her work on the television show Grey’s Anatomy, was photographed by a paparazzo leaving a New York Duane Reade store carrying bags of purchases. The photo was posted to the celebrity news site Just Jared, accompanying an article about Ms. Heigl’s career. From there it appears that Duane Reade copied the photo and added the photo to its Twitter and Facebook feeds. Additionally, Duane Reade added the following text to the Tweet: “Love a quick #DuaneReade run? Even @KatieHeigl can’t resist shopping #NYC’s favorite drugstore”. Ms. Heigl contends that the Tweet constituted false advertising because it implied that she endorses Duane Reade. Thus, after her requests to cease and desist were allegedly ignored by Duane Reade, the lawsuit was filed. An image of the Tweet in question, which was taken down immediately after the lawsuit was filed, can be found attached to the complaint.

This case presents interesting questions at the intersection of social media, first amendment/free speech, and false advertising law. And, already, there is a debate raging over whether or not Ms. Heigl has a shot of winning her case.  Having been involved in false advertising cases–including a case where a competitor implied in online postings that its product was my client’s product–I know that false advertising claims are serious business, subject, potentially, to treble damages. Moreover, a celebrity’s image is a carefully guarded asset that often carries substantial worth. On the other hand, even celebrities have no automatic right to privacy protection when they step out into the public sphere.

To me, the issue here is twofold. First, whether Duane Reade’s use of a photo copied from a celebrity news site and stripping it of its news context was proper. Second, did the text of the Tweet and Facebook posts, as composed by Duane Reade, cross the line into implying a celebrity “endorsement” or did it rather simply explain what the photo already showed? If the later, I think Duane Reade might have a good defense to Ms. Heigl’s claims as such expressive content is protected under the law. Specifically, in my opinion, the case is likely to turn on whether the phrase “can’t resist shopping” is merely explicative or implies an endorsement. Either way, this case bears watching by anyone interested in just how far corporations can go when using publicly-obtained images of celebrities on social media platforms.

Northwest Airlines, Rabbi Ginsberg and Good Faith/Fair Dealing

Posted in Legal Decisions

So by now, you’ve probably heard of the tale of the Rabbi versus Northwest Airlines. Northwest, Inc., et al. v. Ginsberg, 572 U.S. ___, (2013) (slip op.). Rabbi Ginsberg lives in Minneapolis. Travels often on Northwest Airlines, as the airline has a hub in Minneapolis. Ginsberg travels often enough on Northwest Airlines that he achieves the coveted status of “Platinum Elite” in Northwest’s frequent flyer program.  Then Ginsberg begins to complain. Often. Like 24 times between December 3, 2007 and June 2008. Including 9 times because–and you can’t make this up–his luggage arrived “late” to the baggage carousel. So Northwest, after providing compensation of $1,925.00 in travel credit vouchers, 78,500 frequent flyer miles, a voucher extension for his son, and $491.00 in cash reimbursements, revoked his “Platinum Elite” status. Ginsberg sues and, critically for this post, alleges violations of the implied covenant of good faith and fair dealing.

file6041234673387The Supreme Court, in a unanimous opinion authored by Justice Alito, concluded that the Airline Deregulation Act of 1978, 49 U.S.C. section 41713, preempted Rabbi Ginsberg’s claims for violations of the covenant of good faith and fair dealing because Minnesota law both imposes a covenant of good faith and fair dealing into every contract and precludes the parties to that contract from waiving those obligations. Conversely, if a state imposes good faith and fair dealing but allows the parties to contract out of the implied covenant, the airline will need to specify in the contract that it does not incorporate the covenant.

In the field of franchise law, the breadth and extent to which the implied covenant of good faith and fair dealing applies often seems to be a murky issue. For example, in Pennsylvania, where my office is, the courts have sometimes generally and sometimes haltingly applied the concept, as found in section 205 of the Restatement (Second) of Contracts, to franchise contracts. In fact, the Pennsylvania case recognizing the covenant of good faith and fair dealing, Atlantic Richfield v. Razumic, arose in the context of a gasoline station franchise termination. In fact, in my experience, states seem to take special interest in applying good faith and fair dealing to franchise termination cases. While the Airline Deregulation Act, of course, has no application in the franchise world, the Supreme Court’s opinion at footnote 2 nevertheless provides a quick, helpful summary of those states that prevent and permit a party form waiving the obligations of good faith and fair dealing. In addition to Minnesota, the jurisdictions that prevent waiver are: Alabama, Alaska, Arizona, Connecticut, Delaware, the District of Columbia, Missouri, New York, and Wyoming. The states that allow parties to contract out of the duties imposed by the implied covenant are: California, Idaho, and South Dakota. Given that I have seen both franchisors and franchisees attempt to wield the implied covenant in litigation, the Supreme Court’s footnote in Northwest Airlines provides a helpful reference for everyone who drafts, litigates and interprets franchise contracts.

As for Rabbi Ginsberg, while I don’t think that the outcome would have been different given previous Supreme Court precedent on the preemption provisions of the Airline Deregulation Act, I do wonder whether this is a case where bad facts–24 complaints in 6 months–helped to make bad law. Further, it should be noted that Ginsberg did not appeal his straight breach of contract claim, a claim that is not preempted by the Airline Deregulation Act. Nonetheless, given that we are down to only three network airlines in the United States–even the named Defendant in the case, Northwest Airlines, has ceased to exist–and that many cities are dominated by one or two airlines at best, I do wonder whether the Court’s expressed faith that the “free market” will protect loyal frequent travelers from mistreatment is realistic.

With the Affordable Care Act (aka Obamacare) Now Live, Efforts Made to Apply Fixes

Posted in Legislative Updates

On April 3, the House of Representatives passed the “Save American Workers Act”, which modifies the definition of “full-time worker” file8841261948414under the Affordable Care Act from 30 hours to 40 hours.

The effect of this change is to decrease the obligations of employers. Under the Affordable Care Act, employers are required to provide coverage to “full-time workers”, which is defined as 30 hours or above per week. By increasing this to 40 hours per week, employers will not have to provide coverage to employees working less than the typical definition of full-time.

The bill is sponsored by Republican Representative Todd Young, but received 18 supportive votes from Democrats. It now goes to the Senate, where a bill, the “Forty Hours is Full Time Act”, very similar legislation, has been introduced. We will keep you posted on the progress of this legislation.

Tesla and New York Auto Dealers Reach a Truce

Posted in Business Updates, Legislative Updates

In what appears in the first instance to be a major concession by Tesla, Tesla and the New York Automobile Dealers Association reached an agreement on Friday that will permit Tesla to keep open its five stores in the New York portion of the New York City metropolitan area.  As readers of this blog are aware, we have been actively following the Tesla story.  Tesla has declared that it intends to sell its electric cars through showrooms owned and operated directly by Tesla, instead of by franchised automobile dealers, because of the complexity of introducing electric cars to the marketplace.

This strategy has run head-on into state dealership laws.  Every state has dealer laws, which have been found to be constitutional and, for the most part, prevent an auto manufacturer from selling its cars directly to the public.  Tesla has been challenging those requirements, with mixed success. (A helpful interactive map prepared by CNNMoney showing how those challenges are fairing so far can be found here.)  Recently, New Jersey concluded that Tesla needed to stop selling through its own showrooms on April 1st, but recent media reports say that decision is being delayed.

The New York deal is interesting because in it, Tesla reportedly agreed that future stores in New York will be dealerships.  This seems to be a significant and substantial change in Tesla’s marketing and sales distribution strategy.  If it does amount to such a change, it would seem to mark a major success for the various state automobile dealers associations who have fought Tesla with vigor.  On the other hand, it could also show that Tesla, upon further consideration, can see the advantage of sharing the costs and risks of nationwide expansion with franchised dealer networks–and business plan that so many of us know, when executed well–as I have every confidence Tesla will do, has been extremely successful.  Moreover, maybe Tesla believes that the value of its car and brand–it was after all the highest rated car by a major consumer publication last year–are sufficiently established so as to permit competition with traditional internal combustion vehicles on dealers’ lots.  Only time will tell.

Connecticut Bill Would Tax Franchisors for Franchisee’s “Low Wage” Employees

Posted in Legislative Updates

file0001348149In February, Connecticut HB 5069 was introduced into the Connecticut State House by Reps. Riley (D-46), Albis (D-99) and Mushinsky (D-85). The Bill, named “An Act Concerning Low Wage Employers”, requires a “Covered Employer” to pay a fee to the Connecticut Labor Commissioner on a quarterly basis equal to one dollar for each hour any employee has worked for the Covered Employer while not being paid the standard rate of wages predetermined by the Labor Commissioner pursuant to Connecticut Law. This fee would be paid with respect to any employee who works over five hundred hours.

Clearly, the bill is intended to support minimum wage laws and many may think this an effective enforcement mechanism.

BUT – the issue for the franchise industry is that a “Covered Employer” is not always an employer at all. It includes “any franchisor whose franchisees, collectively, directly employ at least five hundred employees in the state”. So, a franchisor with Connecticut franchisees would be required to pay this fee, which could be quite large, if the franchisee paid their employees less than the standard rate required by Connecticut.

So, what would be the franchisor’s choice if this bill were to become law? Should it tell its franchisees, which are separate legal entities, how they should pay their employees? This brings them into the realm of excess control of their franchisees’ businesses leading, perhaps, to vicarious liability concerns. Should they require indemnification by their franchisees – still perhaps involving control issues and tremendous administrative burden? Or should them be sure they don’t have franchisees which collectively have over five hundred employees which work over five hundred hours? This seems a bit absurd, and certainly muddies the waters respecting vicarious liability…..

This bill seems to redefine the franchise relationship – that which has historically been one of two separate legal entities entering into a business contract – by labeling a franchisor as the employer of its franchisees employees.

Ronald McDonald’s Response to Taco Bell’s “Ronald McDonalds” Goes Viral

Posted in Business Updates
Credit: twitter.com/McDonalds

Credit: twitter.com/McDonalds

If you have watched any of the NCAA’s “March Madness” men’s basketball championship tournament this weekend, you almost certainly saw a Taco Bell commercial for its new breakfast offerings (which include a breakfast “waffle taco”!). The commercial uses about two dozen men named “Ronald McDonald” as paid endorsers (or at least that’s what the fine print seems to say) for Taco Bell’s new breakfast. Where things got interesting is that McDonald’s used the medium of social media to quickly fire back at Taco Bell. First, McDonald’s posted an image of its Ronald McDonald petting a chihuahua with the statement, “Imitation is the sincerest form of flattery”. Next, starting Monday, McDonald’s will offer free McCafe coffee until April 13th.

But what about Taco Bell engenders such a response from McDonald’s?  The answer is surprisingly simple.  McDonald’s controls about 25 percent of the fast-food breakfast market.  And numerous reports show that breakfast is the most profitable part of the day for fast-food restaurants.  Consequently, it is a natural that McDonald’s wants to protect its hard won success at breakfast.

What is interesting to me is that the tools of social media have allowed McDonald’s to launch a clever and–I assuming here because I have no inside knowledge–relatively inexpensive defensive campaign against Taco Bell.  In the days before social media, of course, there were still punches and counter-punches in the fast-food wars.  I mean, for those of us of certain age, how can we ever forget Clara Peller’s comedic bellowing in Wendy’s “Where’s the Beef?” commercials.  Here, McDonald’s social media response–which has gotten extensive earned media coverage–did not require the quick development of a series of television commercials, radio ads or even the purchase of full page advertisements in major American newspapers. The world is indeed different.


The Fight Over Tesla, Continued

Posted in Industry Updates

file0002049699944Last year, I wrote about Tesla’s efforts to sell its vehicles directly to consumers, and the efforts of dealers and their legislative allies to prevent direct sales.  I won’t rehash those arguments here.  Suffice it to say that franchised dealers want Tesla to sell its cars–which start at $71,000–through franchised outlets.  Every state of the union has such laws, though some states–the large commercial states of New York, Florida, Pennsylvania, Illinois and California among them–have permitted direct sales.

At the time of last year’s article, New Jersey was also in the ranks of states permitting the sale of Tesla automobiles directly to the public.  Last week, that changed.  Effective April 1, 2014, Tesla is now required to sell in New Jersey through licensed franchise dealers.  Specifically, the New Jersey Motor Vehicle Commission refused to issue Tesla a license to sell cars directly to consumers, and indicated that Tesla’s original permission to sell the cars directly was a “mistake”.  This means that Texas, Arizona and New Jersey all ban Tesla from selling cars directly to consumers.  Additionally, an attempt to change North Carolina law to prevent direct auto sales failed last year.

At the end of the day, New Jersey’s decision probably doesn’t impact consumers too heavily. After all, someone wanting to purchase a Tesla in New Jersey need only cross the Hudson or Delaware Rivers into New York or Pennsylvania to make the direct purchase.  The Tesla test case continues to fascinate, though, precisely because it represents a disruptive challenge to a well-established way of doing business.  Will more states follow New Jersey’s lead and re-interpret their state auto dealer franchise laws to require sales through dealerships? Or will Tesla’s reportedly furious lobbying effort at the federal level lead to greater federal intervention in the franchise community?  The second result would be curious, as it would represent federal regulation of the sort that arguably favors the free market at the same time it would be choosing a potential winner in the marketplace.  Stay tuned.

Start the FTC and State Annual Update and Renewal Process Now!

Posted in Regulatory Compliance

Many franchisors’ fiscal year ended on December 31st.   The FTC gives a franchisor 120 days to update its franchise disclosure document (FDD) but  you should be gathering the information needed to update your FDD and file your statespiral photos renewals (if applicable) NOW!    Below are some quick tips franchisors should follow to ensure they meet the deadlines:

  1. Keep in contact with your accountants or finance division and remind them that the audited financials must be completed before April 30th. Many delays in updating an FDD will be the result of auditors not having adequate time to prepare the financials. For franchisors filing state registration renewals the deadline for the audit may be sooner. Some states require that renewal registration applications be filed days or weeks in advance of the 120 day deadline.  If you are filing state renewal registrations make sure you get your Consents of Accountant forms returned with the financials.
  2. Begin compiling the additional information needed to update your FDD in an organized and complete manner. This includes changes to executive personnel, disclosure of new litigation, updated financial performance representations under Item 19, and current franchise sales data for the 2013 year.  If your outside or in-house counsel does not provide you with a renewal questionnaire or list of needed information to easily compile this data then request they do so.
  3. Make sure that the outside or in-house counsel responsible for overseeing the final updates or filing state renewals are provided with accurate draft documents and other information with ample time to review, revise, comment, and finalize. Seasoned franchise counsel should have a streamlined system in place for handling updates and renewals. The starting place to this process, however, is getting accurate information from the franchisor.

Failing to update or file renewal registrations on time can impede a franchisor’s ability to offer and sell. Therefore, it is important to get a head start on the process to give all parties involved adequate lead time.

Managing a PR Crisis–Lessons from the Man Who Lived through “New” Coke

Posted in Business Updates

SOSOn Tuesday at the International Franchise Association Annual Convention, I attended a great roundtable session hosted by Carlton L. Curtis of Coca-Cola’s FoodService Division. Carlton was there in 1985, when Coca-Cola introduced what came to be known as “New” Coke but which Carlton reminded us was just “Coke” at the Coca-Cola Company. Even though Coca-Cola had solid reasons for its decision, in particular the fact that market research showed consumers greatly preferred “New” Coke’s slightly sweeter flavor, loyal consumers of the Coca-Cola brand were devastated by the switch. What was terribly galling to consumers was that Coca-Cola took away their beloved formula and replaced it with “New” Coke, leaving them no choice. As Carlton noted, he knew Coca-Cola was in deep trouble when a grandmother called their telephone hotline (remember, this firestorm happened before the days of the internet, let alone Twitter or Facebook) to tell them that she did not drink soda. But if she did, it would only be Coca-Cola and not “New” Coke.

After Coca-Cola re-introduced the “Original Formula” Coke–and, yes, Peter Jennings did break into General Hospital to announce the return of the “Original Formula”–it took stock of what it had learned from the process. From that, Coca-Cola developed three guiding principles that are as relevant today as they were nearly 30 years ago:

  1. Figure out if you are fighting an attack by a third-party or your own missteps. This a critical determination, as you may need to counter an attack but apologize for and correct your own missteps. Coca-Cola at first believed it was only fighting people would were adverse to “New” Coke, not realizing that its own missteps were a significant part of the “New” Coke imaging problem. For example, consumers were acutely angered by the removal of the choice of “Original Formula” Coke from store shelves.
  2. Don’t inadvertently enlarge the issue.  The media likes to cover fights. Consequently, if you fight fire with fire, you might just give a story that wasn’t going anywhere legs! Always a good idea in the heat of the moment to take a step back and think things over. It is the rare situation that requires you to go full bore.
  3. Don’t be disingenuous.  Think Watergate here. The truth often has a way of coming out. And if you’ve engaged in a coverup, that always becomes a focus of media and public attention that will almost invariably harm the brand.

These are great principles to follow in any PR crisis–or frankly any legal crisis–your brand might face. As a lawyer, number 3 really hits home. When prepping them to testify at deposition or trial, I always tell my clients and witnesses that, if they don’t remember anything else I tell them, to remember to tell the truth. It’s not only the right thing to do, it also protects you from perjury and allows you to always keep your story straight. No matter how much harm you think the truth can cause a brand, the coverup is always far worse!

Sugary Drink Legislation moves West–Far West

Posted in Legislative Updates, Regulatory Compliance

In keeping with this blog’s attention to legislation addressing the health hazards of “sugary drink” consumption, we now move to the great state of California.  Bill number SB 1000 was introduced in California by Senator Monning on February 13, 2014. Named the “Sugar-Sweetened Beverages Safety Warning Act”, the proposed legislation speaks to the health hazards relating to sugar-sweetened beverages and obesity as the driver of the legislation. The focus of the bill, and the main colorful strawspoint of the discussion in some of the articles I read in the press, was the requirement that a warning be placed on all sealed beverage containers which have 75 or more calories of added sweeteners in every 12 ounces.

So, what about the franchise industry? The bill does go farther to require that warnings be placed in various locations at stores that sell these drinks through vending machines of beverage dispensing machines. The text of this portion of the bill follows:

111224.20. (a) Every person who owns, leases, or otherwise legally controls the premises where a vending machine or beverage dispensing machine is located, or where a sugar-sweetened beverage is sold in an unsealed beverage container, shall place, or cause to be placed, a safety warning in each of the following locations: (1) On the exterior of any vending machine that includes a sugar-sweetened beverage for sale. (2) On the exterior of any beverage dispensing machine used by a consumer to dispense a sugar-sweetened beverage through self-service. (3) At the point-of-purchase where any consumer purchases a sugar-sweetened beverage in an unsealed beverage container, when the unsealed beverage container is filled by an employee of a food establishment rather than the consumer. (b) The safety warning required by subdivision (a) shall contain the following language: “STATE OF CALIFORNIA SAFETY WARNING: Drinking beverages with added sugar(s) contributes to obesity, diabetes, and tooth decay.”

 Industry groups are beginning to weigh in on the merits of this legislation. In any case, it will be important to track this legislation to ensure compliance by franchised fast-food and other food/beverage concepts.